Los Angeles VC stars on the rise amid mega-outings
The city of stars emerges from the shadow of Silicon Valley.
Pay Palis recent Acquisition of $ 4 billion of the shopping-discount platform Darling was the latest indication that Los Angeles may pull off billion dollar exits. The deal was a tech startup’s biggest sale in town and was the second-biggest release after BreakIPO of $ 19.7 billion in 2017. In another high-profile episode, Dollar shave club sold to Unilever for $ 1 billion in 2016.
Until recently, the city’s venture capitalists were best known for their fundraising in an area that is home to only a few large companies. However, the local startup ecosystem has matured with the arrival of larger venture capital funds and a growing presence of large tech companies looking to capitalize on the entertainment capital of the world.
“At first I think the tech environment was pretty thin,” said Mike Jones, CEO of Sciences, Inc., a Santa Monica-based incubator and investor. “The (major venture capitalists) were really headquartered in San Francisco, and they saw Los Angeles as a prospecting arm. Over the past 10 years that has changed dramatically.”
Los Angeles hit a fundraising record last year and 2019 is not far behind. So far this year, the region was home to 661 venture capital deals, worth a total of around $ 8 billion, according to PitchBook estimates. This places the region in fifth place in terms of size and number of transactions, behind San Francisco, New York, San Jose and Boston.
Just far enough
Los Angeles’ relative proximity to its northern neighbor, San Francisco, has long defined the city’s VC ecosystem.
“Historically, if you were a great company looking for venture capital funding, no matter where you were, you would likely be visiting Silicon Valley at some point,” said Shamin Walsh, director by email. General of BAM Ventures. “The Los Angeles ecosystem continues to mature, but evolving beyond a regional player into a market that you are looking for just because you want to work with a particular VC will continue to be a challenge.”
At the same time, the biggest companies in the tech industry are building great outposts in the city, attracting valuable new talent and raising the market profile for investors. Google signed for a third campus in Los Angeles in January, while Northern California Netflix remains one of the city’s greatest business principles. AmazonThe film production arm of moved to the historic Culver City studios in 2017. And that of Elon Musk EspaceX has lived in the suburb of Hawthorne, Calif., since 2002.
Proximity to Silicon Valley adds to a positive bottom line, said John Keatley, a native Angeleno who co-founded and directs Financial Scratch, a mobile app that connects pet owners with affordable veterinary care. The Pasadena-based company, widely known as ScratchPay, has raised around $ 73 million to date.
“You can choose to fly under the radar if you want and avoid the Bay Area Echo Chamber, or you can stay close by. You can recruit from this pool whenever you want, or recruit locally,” Keatley said in an email. “It’s like going to college a day’s drive from your parents’ house. You can come home and do the laundry whenever you want or stay away when you want.”
The Series A Problem
Seed funds still define the Los Angeles venture capital ecosystem. Larger local funds raised by people like Initial companies and Fifth Wall Ventures, could help propel LA startups up the capital pile, further improving the city’s reputation as venture capital. Fifth Wall, for example, closed a $ 503 million fund focused on real estate technology in July, placing it among the largest funds based in the region.
But the general shortage of Los Angeles-based funds capable of running a Series A or later cycle has created a “deadlock” for local startups looking to move past the startup stages, said Andy Wilson, executive director of the Alliance. for Southern California Innovation. , a non-profit organization that promotes the growth of the region’s entrepreneurial ecosystem.
“Series A is always a place where it’s still a bit of a leap of faith, and that’s where relationships matter,” Wilson said. “I think even though we are able to bring capital here, the level of performance tends to be significantly higher than it would be if we were still in the same ecosystem.”
In the case of ScratchPay, it was helpful to have a local investor with a strong presence in Los Angeles (albeit a New York headquarters) to run its $ 6.4 million Series A in 2018, said. CEO Keatley.
“It probably would have helped to have more local funds that could lead our A round,” Keatley said.
However, data from PitchBook suggests that the A-Series problem may be reduced. The number of Los Angeles-based seed funds–those with less than $ 50 million in commitments–have fallen as a share of total fundraising in recent years, while new funds capable of making larger investments are gaining ground. In 2016, vehicles under $ 50 million made up 71.4% of fundraising efforts in Los Angeles; So far in 2019, that figure is only 9.1%.
And the Series A problem may not be that problematic in practice, said Brendan Wallace, CEO and co-founder of Fifth Wall, a Venice Beach-based company that primarily competes in Series A and B for kids. startups located in various markets. “I don’t think Los Angeles startups are particularly crippled by the lack of institutional capital in Los Angeles,” he said.
It might even help. According to Shamin Walsh, deals made with companies outside of Southern California can generate valuable buzz, benefiting Los Angeles’ venture capital ecosystem in the long run.
“This will help build the national interest in us, and the more people that come to us the better to establish LA as a destination and not as a stopover on the way to an exit,” wrote Walsh.
A powerful confluence of legacy creative industries and new technology positions the city for even greater growth over the next several years, assuming current market conditions persist.
Media, retail, and real estate all have deep roots in Southern California, but they are adapting quickly to new technologies. A myriad of other industries, including esports, commercial space, fashion, medical technology, and transportation, also have strong roots in Los Angeles.
“I think you’ll see the big tech operators that aren’t actually based in Los Angeles establishing more of a presence in Los Angeles just because of this fact,” Wallace said.
But the key to the future of the business in the region may lie in what Andy Wilson calls “inclusive innovation”. The city’s infamous sprawl also leads to one of its greatest assets – diversity.
Wilson added: “We believe that the disparate perspectives, the different origins, the different cultures actually bring about creative problem solving in a much broader spectrum.”
12/12/19: Article updated to correct 2019 transaction flow figures.
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